Has the Bank of England’s remit really changed?

The Bank of England’s remit has been changed by the Chancellor of the Exchequer George Osborne although crucially the inflation target of 2 per cent of the Consumer Price index remains the same.

The Chancellor will now require the Bank of England to set out clearly the “trade-offs” it has made in deciding how long it will be before inflation returns to target, an acknowledgement of just how frequently the Bank has been missing that target.

Some experts are speculating that the MPC may now consider issues such as unemployment or GDP growth.

The move also involves changing the timing of letters that the Bank of England Governor must write to the Chancellor when the inflation target is missed. These letters have become a regular occurrence, but the Chancellor wants to leave room for more of his response.

The move could alarm some who believe that the ‘independence” of the Bank is breaking down.

Osborne said: “To ensure a fuller communication between the Bank and the Treasury, I am changing the timing of the open letter system so that when inflation is above target, the Governor will write to me on the day the minutes of the next MPC meeting are published to allow for a more substantive exchange of views.”

The new remit also recognises that the Monetary Policy Committee may need to use unconventional monetary instruments to support the economy while keeping inflation stable.

It also says that the Committee may wish to “issue explicit forward guidance” including using intermediate thresholds in order to influence expectations on the future path of interest rates.

This is an expected development and follows the thinking of many financial experts suggesting that by giving greater indication of the future direction of interest rates, it can foster a more stable environment for businesses.

This borrows strongly from the US. As the Chancellor said: “That is what the US Federal Reserve has now done – making a commitment to keep interest rates low while unemployment is high, provided inflation is not expected to rise too much. This can help the economy because it gives families planning their futures, and businesses wondering whether to invest, more confidence that interest rates will stay lower for longer.”

The MPC has been asked to give an assessment of how this might work in the UK and to start the assessment in April under tenure of Mervyn King though it will report in August on the watch of King’s successor Mark Carney.

What remains to be seen is whether this means that the UK could move to an explicit or semi explicit target for employment as is the case with the US or perhaps for GDP growth, which is arguably more of a concern in the UK. This week’s unemployment figures showed a small rise but it remains better than might have been expected in this period of low growth. No doubt economists are already starting to debate the matter.

7 thoughts on “Has the Bank of England’s remit really changed?”

I will be in Athens and other parts of Greece just after Easter and will be meeting several Greek friends. I will see and hear for myself what the situation is but I gather from talking to them by phone that real life is as grim as ever and, as you correctly point out, disconnected from the financial world. I believe that Alex Tsipras of Syriza party was corrects when he said that the return to the bond market was in fact a disaster and that Greece needed a write down of debt. I cannot ever see Greece repaying what it owes however the lenders may extend the repayment date to infinity and beyond – in effect a write off.

It is easy to forget now but the initial programme was supposed to only last 3 years. Since then we have had various mini-defaults on official lending to Greece as the maturity of the debt has been lengthened. I would not be entirely surprised if we ended up seeing at least some perpetual stock issued.

I will be interested to read what your friends on the ground in Greece think and say.

I agree about the cheerleading and credit taking which will go on when Greece’s economy does improve. It is therefore even more important to remember the scale of the drop as I am sure it will slip their minds..

Hi Shaun
A regular topic of your on here the strength of the Euro has not gone away. It is still above 1.38 against the US Dollar which must be way too high for Greece. Will a strenghtening Euro mean even more austerity is in store for Greece?

The rally of the Euro which has now been in trade weighted terms some 10% since the recent low in July 2012 has made Greece’s “internal devaluation” more difficult. Even Mario Draghi is on the case now. From Reuters.

“The strengthening of the exchange rate would require further monetary policy accommodation.”